The end of manufacturing in Australia

Ross Gittins has a piece, drawing on research by Jeff Borland of the University of Melbourne, in which he presents a “glass half-full” view of the Australian manufacturing sector. He makes some good points, but the overall picture is misleading.

It’s true that, on standard statistical definitions of the manufacturing sector, there’s still a fair bit of employment and output, though both have declined in recent years and will almost certainly continue to do so, given the recent closure announcements. But what’s left of manufacturing looks very different from the mental image the word ‘manufacturing’ produces, at least for me: a large factory, with hundreds of manual workers producing complex industrial products (consumer goods, motor vehicles, industrial equipment and the like).

A closer look at Borland’s data reveals the following:

* Within manufacturing, the main growth area is food processing typified by the production of meat, bread, milk and wine. More traditionally manufacturing-oriented parts of the sector like canning fruit are in decline as we saw recently with the near-closure of SPC.

* As regards employment, the share of managerial and professional staff is expanding, while that of laborers and machinery operators, the kind of jobs we would typically think of as ‘factory work’, is falling. [1]

On the latter point, Borland shows that laborers and machinery operators now represent 30 per cent of a manufacturing workforce of 955 000, implying around 285 000 jobs in total, around 2.5 per cent of all employment. By contrast, in 2011, there were 290 000 schoolteachers in Australia.

To sum up, manufacturing in the traditional senses of the term, is no longer a significant part of the Australian economy. This has a number of implications.

First, for better or worse, the “protection vs free trade” debate is over, at least as regards trade in manufactured goods. There is, for practical purposes, no manufacturing sector left to protect, and no way of bringing back what has gone.

Second, the kind of Laborism that sees factory workers (typically caricatured as having reactionary social attitudes) as the archetypal base of the labour movement and the ALP, in contrast to middle-class parvenus like schoolteachers (caricatured as latte-sipping lefties), needs to be consigned to the dustbin of history.

Third, ideas about industry policy need to be brought up to date, with a focus on services rather than goods. This is likely to imply more scope for intervention rather than less, since the traditional arguments for free markets and free trade are often a lot less convincing in relation to services.

fn1. The share of technicians and skilled trades (within a falling total) has remained stable, but I suspect that within that group, there has been a shift towards technicians and away from manual trades.

37 thoughts on “The end of manufacturing in Australia

  1. I think the role of technology in changing what we all understand by “manufacturing” is understated. Retail 3D printers spring to mind, although I cannot claim to know a lot about them, they certainly seem able to be a real game-changer in worldwide manufacturing industries. Is manufacturing destined to become a diminishing industry around the world?

  2. JQ: “… needs to be consigned to the dustbin of history …”
    I suggest consigning this cliché to the dustbin of history.
    The problem is that dustbins and rubbish tips are as useful to historians as they are to detectives, celebrity-hacking journalists and the extremely poor in Cairo. Where would archaeology be without middens?

  3. I agree that the picture of Australian manufacturing that Ross Gittins tries to portray—one in which job losses are almost all about productivity increases rather than trade and the manufacturing industry is successfully reshaping itself to fit Australia’s comparative advantage—is misleading. In fact, I’d describe the piece as shamefully mendacious.

    It’s hard to understand why somebody would respond to people’s concerns about the impending collapse of the motor vehicle manufacturing industry by talking about automation—as if people can be fooled into thinking that their cars are going to be made by robots rather than German and Japanese workers.

    In a piece full of statistics, Gittins for some reason doesn’t find space to mention that the value of Australia’s manufacturing imports is more than twice the value of its manufacturing exports. He also doesn’t find space to put Australia’s 8.0% manufacturing employment share into context, by, say, comparing it with the 15.4% share for the EU, which is roughly balanced in terms of manufacturing exports and imports, or the 12.5% share for the OECD group of nations.

    But the worst part of the Gittins article is this:
    “Many people would explain this [manufacturing employment] decline in terms of the removal of protection against imports in the ’80s and the very high dollar since the start of the resources boom in 2003. But, in fact, the great majority of it is explained by nothing more than automation. How do I know? Because if you look at the quantity (or real value) of manufactured goods we produce, it reached a peak as recently as 2008, and has since fallen just 6 per cent.”

    This argument makes no sense whatsoever. The fact that Australian manufacturing output was still rising tells you nothing about the extent to which Australia was relying on imports to meet its demand for manufactured goods. He doesn’t even look at manufacturing output *per capita*, for crying out loud!

    According to the OECD’s Trade in Value Added statistics, in 2009 foreign manufacturing value added embedded in Australia’s final demand amounted to 6.9% of Australia’s GDP, while the corresponding contribution of Australian manufacturing value added to foreign final demand was 2.9% of Australia’s GDP. There was thus a 4% gap. Given that Australian manufacturing amounted to 9.3% of GDP in 2009, this implies that Australia’s manufacturing share of value added was 70% of what it would have been if Australian production reflected Australian final demand.

    The discussion about Australian manufacturing realigning itself to fit with Australia’s comparative advantage by increasingly focusing on food and beverages is misleading too. Of course, in percentage terms, increases must occur somewhere to offset decreases elsewhere. But Australia’s food manufacturing industry is no more export-oriented than Australian manufacturing as a whole. Its relative strength is solely down to the fact that it commands about 80% of the domestic market, whilst other industries are subject to much higher degrees of import penetration. The value added by Australia’s food manufacturing industry is only 10% greater than the food manufacturing value added embedded in Australian final demand; it claws back the value added gap from 4.22% to 4.05%. It’s a piffling amount.

  4. @Luke Elford

    Luke, I don’t think the imported cars etc. are going to be made by Japanese and German workers, more likely by Korean, Thai, Chinese workers. High productivity production, which protected mfg in advanced countries is no longer exclusive to them. No surprise that countries in the EU, a contiguous and large market largely free of barriers, can export to one another easier than we can. There will always be an advantage to some mfrs by being local, but the horse has bolted on cars etc. Some foods will have that natural protection for cultural, cost and geographical reasons, but our rice, meat, wheat industries are highly efficient, green and cater to foreign buyer preferences so there is a future here. Mercantilism per se is not the answer I think, but I’d like to hear how we can support what is going to work with some probability.

  5. Thank you for a most interesting article, and sequence of correspondence. I cannot offer any educated comments on economics, only the following reflection discovered whilst working in the Victorian construction industry in the 1970’s and 1980’s.
    While working in the company’s head office in the early 1990’s I was intrigued as to when was the most recent construction of a factory in Victoria. After little research I discovered that the last time this major construction company had built a factory was 1968. Until that time I had considered Australia as a country looking for development, looking to position itself reasonably well in the developed world. Even after considering the commercial nature of the construction industry this huge break in the construction work rather disturbed me.
    I left Australia in 1993, to work in various Asian countries and I am still working away. Every time that I return I find the diversity of industry in Australia has decreased, and the recent occurrences are very disturbing.

  6. @Deena Bennett

    Deena, as factories are physical sites and a framework for production, I don’t think increases in the number of factory buildings is a measure of economic growth in a builtup location, compared to what happens inside them or on the site. When existing buildings are recycled to facilitate higher value usage, most obviously in the inner city areas and including residences, intensive growth rather than extensive growth is happening. Not many high value locations and buildings can afford to stay empty for long here, our big cities are not US rustbelt cities like Detroit.

    Maybe new saw-tooths are out but I would have thought the extensive growth of tiltup concrete buildings in suburban industrial zones continues apace. Not only mfg but construction is changing.

  7. @kevin1

    I chose Germany and Japan because they’re the main suppliers of cars to the Australian market at the moment. I don’t think that this will drastically change in the three years within which Holden and Toyota will shut down—and these countries are going to have to continue exporting something, if they want to import minerals, clothing, etc.—but I agree that the other countries you mention are likely to play a larger role over time.

    I think it’s interesting to consider what the future for Australian manufacturing might hold if and when we’re no longer in a position to export huge amounts of coal and iron ore, but unfortunately I don’t have any bright ideas about this.

    The problem with food manufacturing is that those parts which are closely tied to primary production—meat processing, dairy products, sugar, etc., all of which Australia exports in net terms—can’t grow much without large increases in the corresponding output of primary products. For other parts of the food manufacturing industry, the key advantages lie either in being close to markets, as you note, or having cheap labour.

    Looking at the Trade in Value Added statistics for New Zealand, they offset about half of their net imports of chemicals, metals, machinery and equipment, transportation, and other manufacturing value added (3.99% of GDP) with net exports of food manufacturing value added (2.05% of GDP, cf 0.17% for Australia). (Net exports of wood/paper/printing/publishing value added contribute another 0.83%.) But on a per capita basis, New Zealand has 11 times as many dairy cattle, about as many beef cattle, and three times as many sheep as Australia.

    I think it’s realistic to expect Australian manufacturers to have some success as component manufacturers and ‘niche’ manufacturers in transport and machinery and equipment manufacturing, if minerals exports wane, but obviously not in the mass production of motor vehicles, consumer electronics or standardised machinery.

    But more than anything, I just think it’s important to be honest and realistic about what’s happening with manufacturing in Australia. It’s quite remarkable—even by the standards of other countries that people usually think of as not really doing manufacturing anymore, such as the US and the UK.

  8. I can be persuaded, reluctantly, that our declining manufacturing sector may not mean a decline in our quality of life or standard of living. But I would still like to see a argument made, in clearer terms than have been used in this discussion, stating why we can continue to import indefinitely most of our clothes, electrical goods, cars, furniture, machinery, medical equipment, and sundry household items that make life easy or pleasant. I guess the key word there is ‘indefinitely’. Over time our terms of trade will change as, more than anything else, our mineral wealth as current reserves are diminished and new reserves are exploited. Worrying about a loss of our natural advantages is irrelevant to the near and medium term, and for aluminum and iron, the long term.

    Two of the arguments I see being made in favour of Australian manufacturing are about the stability of mixed economies and the needs of national security. The argument that mixed economies are more stable is more relevant to countries with larger populations or fewer natural resources, or both. And it could be argued that with mining, agriculture, health, education, finance, retail and other services, our economy is mixed enough. The argument that a strong manufacturing sector is necessary for national security would seem to be more emotion based and from a time when war was as important to international relations as trade. The skills and expertese need to maintain our standard of living would appear to be present in our country despite the fact that we don’t make everything we need for our standard of living, so if the rest of the world stopped producing the goods we needed for some reason we would manage, wouldn’t we?

    The fact that other countries with strong manufacturing industries often heavily subsidies those industries is often made. Would this be because these nations don’t have our natural advantages and have to maintain the economy some other way? It also seems that manufactures are leaving Australia despite government support. I’m thinking mostly of the car industry here.

    have to go, keen to know peoples thoughts

  9. @Cameron Pidgeon

    Because Australia has run current account deficits for most of its history, the inward capital flow to finance it has influenced our industry structure and ownership (you may find BOP identity at Wikipedia useful) and our living standards and wealth have continued.

    A lot of the service sector, especially the growing parts, look like low skill, low wage, casual jobs which is not a basis for higher living standards and a smart culture. If the future for high skill service workers is overseas, why would Australian universities continue to train them, and government to support them rather than further run down public education ? What does a viable, progressive, service and educational sector which enhances Australian society (beyond delivering private benefit) look like?

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